Week in Review
Keynesian economics puts the government into the economy. This is why politicians love Keynesian economics. It sanctions government spending. And government investments to help stimulate economic activity. No matter how bad the investment is. For Keynesians have argued that paying people to dig a ditch and to fill it back in with the dirt they just removed will have a positive effect on the economy. Because these ditch-diggers will spend their earnings in the private sector economy. Thus stimulating economic activity. So pulling money out of the economy to pay people to dig worthless ditches has only a positive effect on the economy.
But it doesn’t. For they don’t see the money in the private sector that people can no longer spend because it was taxed away from them to pay people to dig worthless ditches. So at best it’s a wash. But it is never ‘at best’. Because before people spend their ditch-digging earnings it passes through many hands and many government departments. All of which take a little off the top to cover their overhead costs. So government spending is always less than what the private sector would have spent. But Keynesians conveniently ignore this fact. Because they like the validation they receive from the government. And they know they will continue to receive that as long as they tell the government what they want to hear. The government should spend more money (see WBI: More on the Chicken-and-Egg Deficit-and-Jobs Issue by Michael Tomasky posted 3/22/2013 on The Daily Beast).
Our first WBI [Wonky But Important] is built around a March 8 CBO report brought to my attention this morning by Congressman Chris van Hollen–my very own Mongtomery County Md. representative, I am happy to say–finding that half of this year’s expected budget deficit of around $800 billion–half!–can be laid at the door of the struggling economy.
In other words: When the economy is revved up, it reduces the deficit, because there are more tax revenues from all those employed people and businesses working to capacity (and, concomitantly, fewer government expenditures–there’s no need for stimulus spending or lots of unemployment benefits during a humming economy)…
CBO expects that the budgetary effects of automatic stabilizers will remain large because of the continued weakness in the economy, which is caused in part by the fiscal tightening that is occurring in calendar year 2013 under current law. That tightening includes the reduction in federal spending resulting from the sequestration that went into effect on March 1; the expiration of the payroll tax cut that was in place in 2011 and 2012; and the increase in tax rates on income above certain thresholds starting in 2013.
Can’t get much clearer than that. Austerity. Increases. The. Deficit. Asuterity. Increases. The. Deficit.
This relates to and supports the post I wrote Tuesday about that poll showing a horrifying percentage of Americans thinking balanced budgets lead to jobs. No. It’s the other way around. Now you have the CBO saying it, not just me. The Democrats, as van Hollen made clear at this breakfast I attended at Third Way, are banking on people to grasp this. I hope so.
It is amazing how Keynesians can filter through facts and figures and come to conclusions that always support their position. Everything is always better when the government spends more money. And nothing bad happens when government spends more money. In fact only bad things happen when governments spend less money. And they still believe this despite the European sovereign debt crisis. Caused by governments spending too much money.
No Keynesian ever supported this position that prosperous economic times caused by government spending money during the Eighties would reduce the deficit. That defense spending was nothing but bad. Giving the government dangerous levels of debt. But that was then. Now that the Democrats are spending far greater sums than Ronald Reagan did and are running greater deficits than Reagan ever did deficits are now nothing to worry about. Funny how that changed.
If today’s deficit spending is good than Reagan’s deficit spending was good. If Reagan’s deficit spending was bad than today’s deficit spending is bad. You can’t have it both ways.
If we can grow ourselves out of these deficits with expanding economic activity the question is how do we increase economic activity? We need to let businesses do what they do without hindering them. And how do we hinder business? By increasing the cost of business. And lowering the rate of return on investment. Higher regulatory costs increase the cost of business. Higher taxes lower rates of return on investment capital. They pass these higher costs on to consumers via higher prices. Which consumes more of their disposable income. Reducing the amount of stuff they can buy. Thus lowering business revenues. All of which reduces economic activity. It doesn’t increase it.
The reason why we are in the worse economic recovery since that following the Great Depression is the president’s economic policies. More government spending won’t change that. It’s not austerity that is increasing the deficit. It’s the foolhardy policies of Keynesians who believe that government spending generates real economic activity. It doesn’t. It didn’t pull us out of the Great Depression. It didn’t pull us out of the stagflation of the Seventies. And it didn’t pull us out of the Great Recession. But reversing anti-business policies did pull us out of the Great Depression. It pulled us out of the stagflation of the Seventies. And it would pull us out of the Great Recession. If we would only try them.
Tags: anti-business policies, austerity, cost of business, deficit, deficit spending, economic activity, economic recovery, government spending, Great Depression, Great Recession, Keynesian, Keynesian economics, Reagan, regulatory costs, return on investment, Ronald Reagan, stagflation, taxes
Under the Bretton Woods System the Americans promised to Exchange their Gold for Dollars at $35 per Ounce
Wars are expensive. All kinds. The military kind. As well as the social kind. And the Sixties gave us a couple of doozies. The Vietnam War. And the War on Poverty. Spending in Vietnam started in the Fifties. But spending, as well as troop deployment, surged in the Sixties. First under JFK. Then under LBJ. They added this military spending onto the Cold War spending. Then LBJ declared a war on poverty. And all of this spending was on top of NASA trying to put a man on the moon. Which was yet another part of the Cold War. To beat the Soviets to the moon after they beat us in orbit.
This was a lot of spending. And it carried over into the Seventies. Giving President Nixon a big problem. As he also had a balance of payments deficit. And a trade deficit. Long story short Nixon was running out of money. So they started printing it. Which caused another problem as the US was still part of the Bretton Woods system. A quasi gold standard. Where the US pegged the dollar to gold at $35 per ounce. Which meant when they started printing dollars the money supply grew greater than their gold supply. And depreciated the dollar. Which was a problem because under Bretton Woods the Americans promised to exchange their gold for dollars at $35 per ounce.
When other nations saw the dollar depreciate so that it would take more and more of them to buy an ounce of gold they simply preferred having the gold instead. Something the Americans couldn’t depreciate. Nations exchanged their dollars for gold. And began to leave the Bretton Woods system. Nixon had a choice to stop this gold outflow. He could strengthen the dollar by reducing the money supply (i.e., stop printing dollars) and cut spending. Or he could ‘close the gold window’ and decouple the dollar from gold. Which is what he did on August 15, 1971. And shocked the international financial markets. Hence the name the Nixon Shock.
When the US supported Israel in the Yom Kippur War the Arab Oil Producers responded with an Oil Embargo
Without the restraint of gold preventing the printing of money the Keynesians were in hog heaven. As they hated the gold standard. The suspension of the convertibility of gold ushered in the heyday of Keynesian economics. Even Nixon said, “I am now a Keynesian in economics.” The US had crossed the Rubicon. Inflationary Keynesian policies were now in charge of the economy. And they expanded the money supply. Without restraint. For there was nothing to fear. No consequences. Just robust economic activity. Of course OPEC didn’t see it that way.
Part of the Bretton Woods system was that other nations used the dollar as a reserve currency. Because it was as good as gold. As our trading partners could exchange $35 for an ounce of gold. Which is why we priced international assets in dollars. Like oil. Which is why OPEC had a problem with the Nixon Shock. The dollars they got for their oil were rapidly becoming worth less than they once were. Which greatly reduced what they could buy with those dollars. The oil exporters were losing money with the American devaluation of the dollar. So they raised the price of oil. A lot. Basically pricing it at the current value of gold in US dollars. Meaning the more they depreciated the dollar the higher the price of oil went. As well as gas prices.
With the initial expansion of the money supply there was short-term economic gain. The boom. But shortly behind this inflationary gain came higher prices. And a collapse in economic activity. The bust. This was the dark side of Keynesian economics. Higher prices that pushed economies into recessions. And to make matters worse Americans were putting more of their depreciated dollars into the gas tank. And the Keynesians said, “No problem. We can fix this with some inflation.” Which they tried to by expanding the money supply further. Meanwhile, Egypt and Syria attacked Israel on October 6, 1973, kicking off the Yom Kippur War. And when the US supported their ally Israel the Arab oil producers responded with an oil embargo. Reducing the amount of oil entering America, further raising prices. And causing gas lines as gas stations ran out of gas. (In part due to Nixon’s price controls that did not reset demand via higher prices to the reduced supply. And a ceiling on domestic oil prices discouraged any domestic production.) The Yom Kippur War ended about 20 days later. Without a major change in borders. With an Israeli agreement to pull their forces back to the east side of the Suez Canal the Arab oil producers (all but Libya) ended their oil embargo in March of 1974.
It was Morning in America thanks to the Abandonment of Keynesian Inflationary Policies
So oil flowed into the US again. But the economy was still suffering from high unemployment. Which the Keynesians fixed with some more inflation. With another burst of monetary expansion starting around 1975. To their surprise, though, unemployment did not fall. It just raised prices. Including oil prices. Which increased gas prices. The US was suffering from high unemployment and high inflation. Which wasn’t supposed to happen in Keynesian economics. Even their Phillips Curve had no place on its graph for this phenomenon. The Keynesians were dumfounded. And the American people suffered through the malaise of stagflation. And if things weren’t bad enough the Iranians revolted and the Shah of Iran (and US ally) stepped down and left the country. Disrupting their oil industry. And then President Carter put a halt to Iranian oil imports. Bringing on the 1979 oil crisis.
This crisis was similar to the previous one. But not quite as bad. As it was only Iranian oil being boycotted. But there was some panic buying. And some gas lines again. But Carter did something else. He began to deregulate oil prices over a period of time. It wouldn’t help matters in 1979 but it did allow the price of crude oil to rise in the US. Drawing the oil rigs back to the US. Especially in Alaska. Also, the Big Three began to make smaller, more fuel efficient cars. These two events would combine with another event to bring down the price of oil. And the gasoline we made from that oil.
Actually, there was something else President Carter did that would also affect the price of oil. He appointed Paul Volcker Chairman of the Federal Reserve in August of 1979. He was the anti-Keynesian. He raised interest rates to contract the money supply and threw the country into a steep recession. Which brought prices down. Wringing out the damage of a decade’s worth of inflation. When Ronald Reagan won the 1980 presidency he kept Volcker as Chairman. And suffered through a horrible 2-year recession. But when they emerged it was Morning in America. They had brought inflation under control. Unemployment fell. The economy rebounded thanks to Reagan’s tax cuts. And the price of oil plummeted. Thanks to the abandonment of Keynesian inflationary policies. And the abandonment of oil regulation. As well as the reduction in demand (due to those smaller and more fuel efficient cars). Which created a surge in oil exploration and production that resulted in an oil glut in the Eighties. Bringing the price oil down to almost what it was before the two oil shocks.
Tags: $35 per ounce, Bretton Woods, Carter, depreciated dollars, dollar, gas prices, gold standard, inflation, Iran, Israel, Keynesian economics, Keynesians, monetary expansion, money supply, Morning in America, Nixon, Nixon Shock, oil, oil embargo, oil exporters, oil prices, oil producers, oil shock, OPEC, Paul Volcker, printing money, Reagan, recession, Ronald Reagan, stagflation, unemployment, Volcker, Yom Kippur War
Week in Review
The British Left hates Margaret Thatcher. So much that they are already selling t-shirts celebrating her death. Though she is still alive. For she is the Ronald Reagan of Great Britain. A singularly remarkable person who came along just in time to save a nation in decline. And restore it to greatness (see The Left hates Margaret Thatcher because she reminds them they are wrong about everything by Daniel Hannan posted 9/12/2012 on the Daily Mail).
Now and again, we are reminded of the sheer nastiness of a certain kind of Leftie. Not, let me stress, all Lefties: I have Labour friends who are motivated by a more or less uncomplicated desire to help the disadvantaged.
But they march alongside some committed haters who define their politics not by what they like, but by what they loathe. They also define opponents not as human beings with whom they disagree, but as legitimate targets.
A lack of empathy, bordering almost on sociopathy sits behind their talk of caring and sharing.
Not much different from the American Left. Who hate their political opponents. And attack them personally. With no understanding of the underlying policy in question. For they never say they prefer tax, borrow and print (money) Keynesian economics over a more Austrian approach of sound money and low taxation. The kind of policies that have made great economies great. Instead they say their opponents hate women, hate poor people, hate children, hate seniors, etc. And yet they are the tolerant people. Who tolerate everyone that agrees with them. And hates all those who disagree with them. Making these tolerant some of the most intolerant of people. Which is why they hate Ronald Reagan in America. And they hate Margaret Thatcher in Britain. Even though they both returned their countries to prosperity after a decade of decline and despair.
I am just old enough to remember the end of the Seventies: power cuts, three-day weeks, constant strikes, price and income controls, inflation.
Worst of all, I remember the sense of despair, the conviction that Britain was finished.
I don’t believe you can grasp Margaret Thatcher’s achievement without the context of what she displaced.
Throughout the Sixties and Seventies, this country had been outperformed by every European economy. ‘Britain is a tragedy — it has sunk to borrowing, begging, stealing until North Sea oil comes in,’ said Henry Kissinger.
The Wall Street Journal in 1975 was blunter: ‘Goodbye, Great Britain: it was nice knowing you.’
Margaret Thatcher’s victory in 1979 was like a thaw after the cruellest of winters. Inflation fell, strikes stopped, the latent enterprise of a free people was awakened.
Having lagged behind for a generation, we outgrew every European country in the Eighties except Spain (which was bouncing back from an even lower place). As revenues flowed in, taxes were cut and debt was repaid, while public spending — contrary to almost universal belief — rose.
In America we were mired in stagflation and a record high misery index of the Carter Seventies. Much of which he inherited from LBJ’s Great Society and Richard Milhous Nixon’s abandoning of the quasi gold standard. The Nixon Shock. Because he refused to cut Great Society spending. As did Gerald Ford. As did Jimmy Carter. No one wanted to cut back spending and continued to print money to pay for the Great Society spending causing the record high inflation during the Seventies. Which added to the high unemployment that gave Jimmy Carter that horrible misery index. And malaise. Like Daniel Hannan I’m just old enough to remember how bad it was in the Seventies. And how great Ronald Reagan’s Morning in America was. We were better off after 4 years of Ronald Reagan than we were after 4 years of Jimmy Carter. And the numbers proved it. Lower tax rates increased tax revenue. Allowing even greater government spending. Which was the source of the Reagan deficits. Not the tax cuts.
In the Falklands, Margaret Thatcher showed the world that a great country doesn’t retreat forever.
And by ending the wretched policy of one-sided detente that had allowed the Soviets to march into Europe, Korea and Afghanistan, she set in train the events that would free hundreds of millions of people from what, in crude mathematical terms, must be reckoned the most murderous ideology humanity has known.
Margaret Thatcher and Ronald Reagan stood together against communism. While Jimmy Carter eroded America’s military power so much that the Soviets actually put together a nuclear first-strike doctrine. For unlike the policy of Mutual Assured Destruction (MAD) of previous administrations the Soviets believed they could launch and win a nuclear war against Jimmy Carter. Reagan and Thatcher rebuilt and deployed nuclear and regular military forces to reduce the threat of a Soviet first-strike. And made the enemies of Great Britain and the United States fear and respect our military might. It was peace through strength. For all free and democratic countries. Not the detente of Jimmy Carter that encouraged the Soviets to add a nuclear first-strike doctrine. The beginning of the end of the Cold War began under Thatcher’s and Reagan’s watch.
Why, then, do Lefties loathe her so much..?
No, what Lefties (with honourable exceptions) find hard to forgive is the lady’s very success: the fact that she rescued a country that they had dishonoured and impoverished; that she inherited a Britain that was sclerotic, indebted and declining and left it proud, wealthy and free; that she never lost an election to them.
Their rage, in truth, can never be assuaged, for she reminds them of their own failure.
The same reasons the American Left hates Ronald Reagan. Because he, too, returned his country to greatness.
Tags: American Left, British, British Left, Carter, Cold War, debt, decline, despair, Détente, Great Britain, Great Society, hate, inflation, Jimmy Carter, Left, Lefties, Margaret Thatcher, misery index, Nixon, nuclear first-strike doctrine, Reagan, Ronald Reagan, Seventies, Soviets, stagflation, strikes, tax cuts, taxes, Thatcher, tolerant, unemployment
It was Morning in America again because Ronald Reagan reduced the Misery Index by 42.7%
Ronald Reagan was a supply-sider when it came to economics. Of the Austrian school variety. In fact, one of his campaign promises was to bring back the gold standard. A very Austrian thing. The Austrian school predates the Keynesian school. When the focus was on the stages of production. Not on consumer spending. These policies served the nation well. They (and the gold standard) exploded American ingenuity and economic activity in the 19th century. Making the U.S. the number one economy in the world. Surpassing the nation that held the top spot for a century or more. Perhaps the last great empire. Great Britain.
Following the stagflation and misery (misery index = inflation rate + unemployment rate) of the Seventies Reagan promised to cut taxes and governmental regulations. To make it easier for businesses to create economic activity. Easier to create jobs. And he did. Among other things. Such as rebuilding the military that the Carter administration severely weakened during the Seventies (it was so bad that the Soviet Union put together a first-strike nuclear option. Because they thought they could win a nuclear war with Jimmy Carter as president). During the 1980 campaign Reagan asked the people if they were better off after 4 years of Jimmy Carter. The answer was no. Four years later, though, they were. Here’s why. (Note: We used so many sources that we didn’t source them here to save space. The inflation rate and unemployment rates are for August of the respective years. The dollar amounts are annual totals with some estimates added to take them to the end of 2012. The debt and GDP are not adjusted for inflation as they are only 4 years apart. Gas prices and median income are adjusted for inflation. There may be some error in these numbers. But overall we believe the information they provide fairly states the economic results of the presidents’ policies. (This note applies to both tables.))
Reagan entered office with some horrendous numbers. The Carter administration was printing so much money that inflation was at 12.9% in 1980. Added to the unemployment rate that brought the misery index to 20.6%. A huge number. To be fair Carter tapped Paul Volcker to be Fed Chairman and he began the policy of reigning in inflation. But Carter did this far too late. The only way to cure high inflation is with a nasty recession. Which Volcker gave Ronald Reagan. But it worked. By 1984 inflation fell 8.8 points or 66.7%. Even with this nasty recession the unemployment rate fell 0.2 points or 2.6%. Which shaved 8.8 points off of the miserable index. Or reducing it by 42.7%. This is why it was morning in America again. The Left to this day say “yeah, but at what cost?” and point to the record deficits of the Reagan administration. Saying this is the price of tax cuts. But they’re wrong. Yes, the debt went up. But it wasn’t because of the tax cuts. Because those tax cuts stimulated economic activity. GDP rose 12.6% by 1984. And tax receipts even increased with those lower tax rates. Because of the higher GDP. By 1984 Reagan’s policies increased tax revenue by 28.9%. And on a personal level the median income even increased 0.4%. And this following a very bad recession a few years earlier. Finally, gas prices fell 22.2%. And the way Americans feel about rising gas prices this was truly morning in America again.
To Top off the General Malaise of the Obama Economy Gas Prices Soared while Median Income Fell
Barack Obama is a Keynesian through and through. A believer in pure demand-side economics. To that end his administration focused everything on increasing consumer spending. Tax and spend policies. Income redistribution. Deficit spending. Anything to make America ‘more fair.’ Raising taxes on the rich so the poor can spend more money. With the Keynesian multiplier they believe this is the path to economic prosperity. Just doing everything within their power to put more spending money into the hands of poorer people. Increasing government regulation, fees and fines as well as taxes to bring more money in Washington so they can redistribute it. Or spend it directly on things like roads and bridges. Or solar power companies. Even paying people to dig a hole and fill it back in. Because these people will take their wages and spend them. Creating economic activity.
So President Obama put Keynesian economics to work. Beginning with a $787 billion stimulus bill. Investments into green energy and the jobs of the future. Like a Department of Energy loan of $528 million to the now bankrupt Solyndra. Which was only one of many loans. The bailout of the UAW pension fund (aka the auto bailout). The government poured $528 million into GM. And President Obama touted the Chevy Volt, boasting that GM would sell a million each year bringing his green goals to fruition (GM is struggling to sell 10,000 Volts a year). A lot of malinvestment as the Austrians would say. But a Keynesian sees any government expenditure as a good investment. Because if all the people who receive this government money spends at least 80% of it (while saving only 20%) the Keynesian multiplier will be five. Meaning that the net gain in GDP will be five times whatever the government spends. So how has that worked for the president? Well, here are his numbers:
The government spent so much money that the federal debt increased by $5.4 trillion. Trillion with a ‘T’. That’s over a trillion dollar deficit each of the president’s 4 years in office. And his last year isn’t even a whole year. Unprecedented until President Obama. And what did all of that federal spending get us after about 4 years? An unemployment rate 2.1 points higher. Or 33.9% higher than when he took office. Inflation fell but it did nothing to spur GDP growth which grew at an anemic 3.1%. Which is less than a percentage point a year. Which is why the Great Recession lingers still. Meanwhile the Chinese are having a bad year with a GDP growth of 7.8%. So all of that spending didn’t help at all. In fact, it made things worse. The economic activity is so bad that even tax receipts fell 2.2% after four years of President Obama. Which has many in his party saying that we need to raise tax rates. Contrary to what Ronald Reagan did. And to top off the general malaise of the Obama economy gas prices soared 107.6% under his presidency. While the median income fell 7.3%. One has to look hard to find any positive news from the Obama economy. And there is one. Inflation did fall. But even that really isn’t good. As it may be an indicator of a looming deflationary spiral. Giving America a lost decade. Like Japan’s Lost Decade.
The Flaw in Keynesian Thinking is that it Ignores the Layers of Economic Activity above the Consumer Level
So there you have an Austrian and a Keynesian. Both entered office during bad economic times. Although things were much worse when President Reagan took office than when President Obama took office. The misery index was 20.6% in 1980. It was only 11.6% in 2008. About half as bad for President Obama than it was for President Reagan. It came down 16.4% under Obama. But it came down 42.7% under Reagan. Which is why it isn’t morning in America under President Obama. Reagan increased tax receipts by 28.9 % by the end of his first term. They fell 2.2% under Obama. Adjusted for inflation Reagan averaged annual deficits of $348 billion. That’s billion with a ‘B’. Obama averaged $1.324 trillion. That’s trillion with a ‘T’. Or 280% higher than Ronald Reagan. Gas prices fell 22.2% under Reagan. They rose 107.6% under Obama. Median income barely rose 0.4% under Reagan. But it fell 7.3% under Obama. In short there is nothing in the Obama economic record that is better than the Reagan economic record.
And why is this? Because Obama’s policies are Keynesian. While Reagan’s policies were Austrian. Reagan focused on the stages of production to improve economic activity. Cutting taxes. Reducing regulatory compliance costs. Creating a business-friendly environment. A system that rewarded success. Whereas Obama focused on consumer spending. Tax, borrow and print (i.e., quantitative easing). So the government could spend. Putting more money into the pockets of consumers. Which stimulated only the last stage in the stages of production. So while some consumers had more money it was still a business-unfriendly environment. Where tax, regulatory and environmental policies (as well as the uncertainty of Obamacare) hindered business growth everywhere upstream from retail sales. From raw material extraction to industrial processing to construction to manufactured goods. Where these Obama’s policies punish success. For the bigger you get the more you pay in taxes and regulatory compliance costs.
The greatest flaw with Keynesian economics is that it looks at aggregate supply and demand. With a focus on consumer spending. And ignores the layers of economic activity that happens before the consumer level. The Austrian school understands this. As did the British when she became one of the greatest empires of all times. As did America during the 19th century. No nation became an economic superpower using Keynesian economics. Japan grew to be a great economic power during the Fifties and Sixties. Then went Keynesian in the Eighties and suffered their Lost Decade in the Nineties. Some Keynesians like to point to China as an example of the success of Keynesian economics. But they still have a fairly restrictive police state. And their economic policies are hauntingly similar to Japan’s. Some have even posited that it is very possible that China could suffer the same fate as Japan. And suffer a deflationary spiral. Resulting in a lost decade for China. Which is very plausible considering the Chinese practice state-capitalism where the state partners closely with businesses. Which is what the Japanese did in the Eighties. And it hasn’t been great for them since. As it hasn’t been great in America economically since the current administration.
Tags: Austrian school, Barack Obama, better off after 4 years, Carter, Chevy Volt, China, consumer spending, debt, deficits, deflationary spiral, economic activity, gas prices, GDP, GM, Great Recession, inflation, Japan, Jimmy Carter, Keynesian, Keynesian economics, Keynesian multiplier, lost decade, malaise, median income, misery index, Morning in America, multiplier, Obama, Reagan, recession, Ronald Reagan, Solyndra, stages of production, stagflation, Tax and spend, tax cuts, tax rates, tax receipts, tax revenue, unemployment, Volcker
Week in Review
The Argentines are strong advocates of Keynesian economics. And they’ll embrace it till the bitter end. Even as their economy goes into the crapper (see WRAPUP 3-Argentina economy shrinks in May for first time since 2009 by Hilary Burke posted 7/21/2012 on Reuters).
Latin America’s No. 3 economy is decelerating sharply after posting China-like growth rates for much of the past nine years. High inflation, a sluggish global economy, waning demand from neighboring Brazil, falling grains production as well as new trade and currency controls have prompted the slowdown.
“Stagflation arrived with a vengeance. Argentina now has the weakest economy and the highest inflation in the hemisphere,” wrote Alberto Ramos, a senior economist at Goldman Sachs, adding that private estimates put inflation at closer to 24 percent a year…
Argentina’s unorthodox economic approach centers on heavy state participation in the economy to foment high growth, job creation and domestic demand. The government does not publicly acknowledge the cost of this, which is double-digit inflation.
“We are taking active policies, using our own resources, to generate the virtuous cycle of spending, consumption, investment. You have more demand, more production and that feeds back into more spending, more production, more consumption.”
This is pure Keynesian economics. Like in the Carter years. But even Jimmy Carter didn’t have an inflation rate as high as 24%. So the Argentine stagflation may outdo the Carter stagflation. No doubt beating Carter on the misery index, too (the sum of the unemployment rate and the inflation rate). Proving once again that Keynesian economics doesn’t work.
Still this is exactly what President Obama wants to do with the U.S. economy. And it’s what the leading Keynesian economists are advising him to do. Invest. Spend. To stimulate the economy the only way the federal government can. By deficit spending. Financed with more borrowing. Taking the federal debt to new heights. Or simply by printing money. As in another round of quantitative easing. Even though none of this has worked in the last three and half years under President Obama. Or in the Seventies during the Carter years. Or even in Argentina today.
So when will they learn? When will they abandon Keynesian economics? Never. Because governments love to spend money. And Keynesian economics is all about spending money. Why, some even call this spending virtuous. But there is a price in being virtuous. Asset bubbles (as in Japan resulting in their Lost Decade or in America during their subprime mortgage crisis resulting in their Great Recession). A sluggish economy. And double digit-inflation. Things that never end well. Just ask the Japanese. The Americans. Or the Argentines.
Tags: Argentina, Argentine, Carter, consumption, inflation, investment, Jimmy Carter, Keynesian, Keynesian economics, Keynesian policies, spending, stagflation
Week in Review
No matter how many times their policies fail those on the left never give up. The free market capitalism that gave us the Industrial Revolution was not as good as the mercantilism it replaced. The free market capitalism that won World War II was not as good as Nazi Germany’s National Socialism. The free market capitalism that won the Cold War was not as good as the Soviet Union’s communism. No, any economic system that doesn’t place smart people in the government (and from our most prestigious universities) in charge is an inferior economic system. At least, according to those on the Left (see There Is No Invisible Hand by Jonathan Schlefer posted 4/10/2012 on the Harvard Business Review).
One of the best-kept secrets in economics is that there is no case for the invisible hand. After more than a century trying to prove the opposite, economic theorists investigating the matter finally concluded in the 1970s that there is no reason to believe markets are led, as if by an invisible hand, to an optimal equilibrium — or any equilibrium at all. But the message never got through to their supposedly practical colleagues who so eagerly push advice about almost anything. Most never even heard what the theorists said, or else resolutely ignored it.
Interesting. Using the economists of the Seventies as the authoritative position for government interventionism into the economy. Why, that would be like having the captain of the Titanic being the authority on how to miss icebergs in the North Atlantic.
The Seventies were the heyday of Keynesian economics. Where the government was aggressively intervening into things economic. And the results of their policies were so bad that we had to create new words to describe it. Like stagflation. A heretofore unheard of phenomenon. And something that just wasn’t supposed to happen when the Keynesians used inflation to lower unemployment. But it did. Even though you weren’t supposed to get inflation and high unemployment at the same time. Stagflation. Like we did. In the Seventies.
Believing far too credulously in an invisible hand, the Federal Reserve failed to see the subprime crisis coming. The principal models it used literally assumed that markets are always in instantaneous equilibrium, so how could a crisis occur? But after the crisis exploded, the Fed dropped its high-tech invisible-hand models and responded with full force to support the economy.
The subprime mortgage crisis was a government-made crisis. Precisely because government refused to allow the Invisible Hand to guide the market place. Instead they stepped in. Forced lenders to make risky subprime loans to people who couldn’t qualify for a mortgage. With tools like the infamous Adjustable Rate Mortgage (ARM). And then they had Fannie Mae and Freddie Mac buy those risky mortgages. To get them off the lenders’ balance sheets so they would make more risky loans. Then Freddie and Fannie chopped up these risky loans and repackaged them into ‘safe’ investments to unload them to unsuspecting investors. Getting these toxic mortgages off of their balance sheets. (In case you don’t know, Fannie and Freddie are Government Sponsored Enterprises (GSE). Which are for all intents and purposes the government.) This house of cards imploded when the Fed raised interest rates. After keeping them below what the Invisible Hand would have set them at for far too long. The government created the real estate bubble. Then blew it up when those higher interest rates reset all the AMR mortgage payments beyond the homeowner’s ability to pay.
There are many economists in the world. And the consensus of economic thought tends to be one that supports large government intervention. Which proves the economic consensus is wrong. For if history supported this consensus the Soviet Union would have won the Cold War. East Germany would have absorbed West Germany. China would not be experimenting in ‘Invisible Hand’ capitalism. And Cuba wouldn’t be experimenting with a little capitalism themselves to fix their broken government command economy.
All these market failures economists like to point to aren’t market failures. They are the unintended consequences of government intervention into the market. As the subprime mortgage crisis clearly proved. Which never would have happened in the first place if the government didn’t try to be smarter than the Invisible Hand.
Tags: ARM, capitalism, Cold War, economists, Fannie, Freddie, free market, free-market capitalism, government intervention, inflation, invisible hand, Keynesian, Keynesian economics, Left, lenders, market failures, mortgage, risky loans, risky mortgages, Seventies, Soviet Union, stagflation, subprime mortgage crisis, unemployment
The Twenties saw one of the Greatest Explosions in Economic Growth in History despite being on a Gold Standard
There is a duality in economics. There is Keynesian economics. And the Austrian School. The Keynesians believe in central banking. Forcing interest rates below market rates. Purposely creating a permanent but ‘manageable’ inflation rate. And other government interventions into markets. The Austrians believe in a strong currency. Even bringing back the gold standard. Letting the markets set interest rates. Are against purposely creating inflation. And oppose government intervention into markets. So these two schools are sort of the Yin and Yang of economics. The dark and the light. The wrong and the right. The Keynesian and the Austrian.
So it’s not surprising to see periods of history where these two schools bump up against each other. As we transition from good economic times to bad economic times. And vice versa. When politicians change policies for political reasons. Or when politicians change policies for economic reasons. When the Keynesians are out of power and want to get back into power. Or the Keynesians are in power, have destroyed the economy and the electorate wants to throw them out. Starting shortly after World War I. When John Maynard Keynes’ ideas came to light. Economic policies that used smart people and an active, benevolent government. Exactly what Woodward Wilson and his progressives were looking for. Who wanted to quantify human behavior and improve it. With an activist and scientific government. To bless the United States with their brilliance again now that the war was over. And return to the new enlightened way. Helping people everywhere to be better citizens. And fixing all the ‘faults’ of free market capitalism.
But the progressives lost the 1920 election. The voters favoring Warren Harding’s message to return to normalcy. And rejecting the progressives and their new scientific ways of government. They wanted jobs. And that’s what Harding gave them. By cutting taxes. Thanks to the advice of his brilliant treasury secretary. Andrew Mellon. And getting out of the way of businesses. When he died Calvin Coolidge continued his policies. And the Twenties roared. It was one of the greatest explosions in economic growth in history. Where credit was plentiful. Despite being on a gold standard. As the United States electrified. And modernized. Electric power. Telephones. Radio. Electric appliances. Movies. Even on the farm. Where mechanization provided bountiful harvests and inexpensive food. The Roaring Twenties were great times for consumers. The average American. Thanks to minimal governmental interference into the free market. And capitalism. But, alas, that wouldn’t last.
Ronald Reagan won in a Landslide based on an Economic Platform that was Austrian to the Core
It was the mechanization of the farm that began the process that lead to the Great Depression. The average American benefited greatly from those low food prices. But not the farmers who went into debt to mechanize their farms. And when those European World War I soldiers traded their rifles for plows the American farmers lost some valuable export markets. Farmers were struggling with low prices. And heavy debt. Some defaulted on their debt. Causing bank failures in the farming regions. Which soon spread throughout the banking system. And when president Hoover came to office he was going to help the farmers. For Hoover, though a Republican, was a progressive. He brought back activist government. He interfered with the free market. To fix these problems. Price supports for farmers to import tariffs. Raising costs for businesses. And prices for consumers. Then the Smoot-Hawley Tariff launched an all out trade war. Crashing the economy. And giving us the Great Depression.
The 1930s was a lost decade. FDR’s New Deal policies increased the size of government. And their reach into the free market. Which prolonged the Great Depression. But nothing they tried worked. Despite trying their progressive brilliance for some ten years. It took World War II to pull the United States out of the Depression. When the government at last allowed businesses to pursue profits again. And got out of their way. This surge in economic activity continued after the war and through the Fifties. And into the Sixties. With none other than JFK cutting taxes in a very Austrian way. Yes, Kennedy was an adherent to the Austrian school. But LBJ wasn’t. And when he took over things changed. The progressives were back. Calling themselves liberals now. And instead of the New Deal they gave us the Great Society. Which grew the government even larger than the New Deal did. And the Great Society spent the money. Along with putting a man on the moon and the Vietnam War, government spending exploded. The Keynesians were hitting their prime. For once they could do all of the great things they always said they could. And in the process fix a ‘broken’ free market system. Finally having brilliant people in all the right places in government. Making brilliant policies to help people live better lives.
And then came the Seventies. The government was spending so much that they turned to the printing presses. Because they could. Thanks to central banking. Even if it was hamstrung by gold. You see, at that time the dollar was convertible into gold. And with the Americans printing so much money and depreciating the dollar countries holding U.S. dollars said, “Screw that.” And converted their dollars into gold. That great sucking sound they heard in the Seventies was the sound of U.S. gold reserves getting sucked out of the country. Well, even though the Keynesians hated gold they didn’t want to see all their gold reserves disappearing. So Nixon did something very Keynesian. And decoupled the dollar from gold. Freeing the government at last to spend as irresponsibly as the Keynesians wanted. And spend they did. Turning the printing presses on high. Depreciating the dollar ever more and causing double digit inflation. Worse, all that Keynesian spending did nothing for the economy. There was high unemployment as well as inflation. An unusual phenomenon as you typically had one or the other. Not both. But this was stagflation. A Keynesian phenomenon. And you measured how bad it was by adding the unemployment rate to the inflation rate. Giving you the misery index. And the misery was pretty high during the Keynesian Seventies. It was so miserable that they joked about it on Saturday Night Live. With Dan Aykroyd impersonating Jimmy Carter. Joking about high nice it would be to own a $400 suit. And how nice it was just to make a phone call to get the printing presses to print more money. The people thought Aykroyd’s Carter was funny. But they didn’t care for the real one all that much. And made him a one term president. As Ronald Reagan won in a landslide. Based on an economic platform that was Austrian to the core. Including a promise to return responsibility to government spending by reinstating a gold standard. (Which was a political ‘bridge too far’.)
The Electorate paying Federal Income Taxes fell from 80% when Reagan was in Office to about 50% by 2009
The Eighties were so prosperous that the Keynesians, liberals and progressives derisively call them the decade of greed. They tried everything within their power to rewrite history. Calling the exploding economic activity ‘trickle down’ economics. But the figures don’t lie. Despite the liars figuring. The inflation rate fell. Interest rates fell. The unemployment rate fell. And despite the cuts in tax rates the government was never richer. Tax revenue collected under the reduced rates nearly doubled. But there was little cutting in government spending. Flush with all that cash they kept spending. In part to rebuild the military to win the Cold War. Which Reagan won. But all the social spending continued, too. Which led to some record deficits. Not the trillion dollar deficits of the Obama administration. But large nevertheless. Which provided the meme to explain away the prosperity of the Eighties. “But at what cost?” being the common refrain. They talk about the deficits. But very conveniently leave out that part of how tax revenues doubled at the reduced tax rates.
Well, as time passed the Keynesians got back into government. In the late Nineties as they kept interest rates low again to stimulate the economy. Creating the dot-com bubble. And the early 2000s recession. George W. Bush cut taxes. Brought the economy out of recession. But then the Keynesians went back to playing with those interest rates. Kept them artificially low. Creating a great housing bubble. And the Subprime Mortgage Crisis.
Keynesian economics have failed throughout the last century of trying. And taxpayers clearly saw this along the way. Voting for Austrian policies every time economic policy mattered. Especially after another failure of Keynesian policy. Every time their policies failed, though, the Keynesians had an excuse. Supply shocks. Liquidity traps. Something. It was always something that caused their policies to fail. But it was never the policies themselves. Despite Mellon, Harding, Coolidge, Kennedy and Reagan proving otherwise. So they had to try something else. And they did. Class warfare. They transferred the tax burden to the wealthier. Reduced the number of people paying federal income taxes. And gave ever more generous government benefits. This took the failed ideology out of the equation. Making it easier to win elections. For when Reagan was in office more than 80% of the electorate were taxpayers. And Austrian economics won at the polls. The Nineties ended with only about 65% of the electorate paying federal income taxes. By 2009 that number shrunk to about only half of the electorate. Which gave the tax and spend Keynesians an edge over responsible-governing Austrians. Because people who don’t pay income taxes will vote for policies to increase taxes on those who do. Not because of concern over economic policy. But just to get free stuff. Something Keynesians learned well. When at first you fail just buy votes. And then you can continue your failed policies to your heart’s content.
Tags: activist government, Austrian school, Austrians, bank, banking, banking system, capitalism, Carter, central banking, class warfare, Coolidge, cutting taxes, debt, deficits, economic policies, farmers, FDR, federal income taxes, food prices, free market, free-market capitalism, gold standard, government benefits, government intervention, government intervention into markets, government spending, Great Depression, Great Society, Harding, Hoover, inflation, interest rates, JFK, jobs, Kennedy, Keynesian, Keynesian economics, Keynesians, LBJ, liberals, markets, Mellon, misery index, New Deal, prices, Progressives, Reagan, Roaring Twenties, Ronald Reagan, scientific government, stagflation, tax cuts, tax rates, unemployment
Keynesian Spending gave us Double Digit Interests Rates, Double Digit Inflation Rates and Stagflation
LBJ was going to end poverty. He declared war on it. His soldiers? Dollars. Lots of them. His battle plan? The Great Society. Tactics? Just throw lots of money at a problem. Hope that some of it actually hit its target. And further hope that some of the money that did hit its target actually did something beneficial. Just hope for the best.
And thus grew the welfare state. The recipients liked it. Because they were the recipients. Government liked it. Because the recipients liked it. Who voted for them out of gratitude. And dependency. And the Keynesian economists liked it. Because government spending was stimulus. And they love stimulus. These Keynesian economists. So everybody kept asking for more. As no one saw the harm in printing money to make people feel good.
The Keynesian said this was proof that a manageable amount of continuous inflation (printing money) would do away with the business cycle. The boom and bust that had recurring good times. And recurring recessions. They said let’s just have a continuous boom. When real demand fell just create artificial demand by having the government step in. Let the government stimulate demand by printing money to spend. And they did. GDP went up. Thus proving their theory. Or so they thought. Until they realized printing all that money had so weakened the dollar that interests rates soared. To double digits. As did prices. Giving us double digit inflation rates. And stagflation. That’s why the economy sucked in the Seventies. And why Jimmy Carter was a one term president.
Bad Monetary Policy gave us Cheap Money, the Housing Bubble and the Subprime Mortgage Crisis
After the dot-com bubble burst the economy went into recession. So the government went to their patented recession cure-all. Monetary policy. Playing with interest rates. I.e., printing money. Because housing sales have always been the key to a growing economy. Because building a house generates a lot of economic activity. And furnishing a house generates even more economic activity. So the best way to kick-start the economy was to get more people into houses. The more the better. Whether they could afford to or not. Because no matter what happens, people always pay their mortgage.
So the government kept interest rates low. Artificially low. To encourage people to borrow money. To buy housees. And they did. But not enough of them did. Poor people weren’t buying. Mortgage bankers were turning them down. Because they couldn’t qualify for a mortgage. So the government pressured them to approve people even if they didn’t qualify. Fannie Mae and Freddie Mac guaranteed these risky mortgages. Then bought them. It worked. Thanks to ARMs and no-doc mortgages, anyone could walk in off the street and get a cheap mortgage with little down. The people liked it. And asked for more. Thus began the housing boom.
People were buying and selling houses like there was no tomorrow. Investors were flipping homes. People were moving up into McMansions. Bidding the price of houses into the stratosphere. Paying whatever the price was. Because the money was so cheap to borrow. Artificially low. Which really inflated the price of these houses. To unsustainable levels. Until the bubble burst. And these prices began to correct to reflect reality. The Fed, waking up the next morning in a stupor, saw what they had done. And desperately tried to fix things. To limit the damage. They raised interest rates. ARMs reset. And the great Subprime Mortgage Crisis began. And thanks to Fannie and Freddie buying those risky mortgages, the contagion spread around the world. To everyone who bought what they thought were safe investments backed by safe mortgages. Because people always paid their mortgages. But were, in fact, backed by the riskiest of all investments. Defaulting subprime mortgages.
The Social Democracies’ Spending gave European Countries Staggering Debt and a Sovereign Debt Crisis
Karl Marx was a German. But his theories quickly swept across the Rhine. Soon there were communists everywhere in the West. After World II, when communism became the new enemy, Western Europe favored something called social democracies. Communism-light. The social welfare state. Cradle to the grave nanny state. With generous state benefits. National health care. Pensions. You name it. And the state gave it.
People liked it. Asked for more. And their governments were glad to oblige. They spent more and more money. Rather, they spent more and more of the taxpayers’ money. These social democracies had some of the highest tax rates. Which was fine with the poor receiving these generous state benefits. But it explains why anti-capitalists like John Lennon and Bono moved out of the UK. To escape the high taxes on the wealth they created with free market capitalism. So there was a capital flight out of these social democracies. While at the same time their public sectors grew. More and more people worked for the government. Received government pay and benefits. And generous pensions. The people liked this. And asked for more. Except Lennon and Bono, of course. And the other superrich who fled these social democracies.
As tax rates climb and capital flees, though, economic activity stagnates. Which forces these countries to borrow. And borrow some of them did. Some of the smaller countries in the Eurozone (Greece) are so in debt that they can’t even roll over their existing debt. They are in such a mess that no one wants to take a chance loaning them money. Because no one thinks Greece will ever be able to repay whatever they borrow. Of course, with the common currency (Euro), Greece’s problems are everyone’s problems. So the richer countries in the Eurozone (Germany) are pouring money into the ECB to try and rescue Greece. And save the Euro. What we call the European sovereign debt crisis. While the world waits with bated breath. Because if they fail it could very well plunge the world into another severe recession. Or worse. Because the world needs the Eurozone. To buy their exports. So they can prop up their own sick economies.
Class Warfare pits the Rich against the Poor and Middle Class, the Taxpayers against the Public Sector
Many, if not all, of the great crises countries have…are…going through is because of bad monetary policy. Using the power of the purse to make happy voters. Whatever the cost. For they were always sure they could avoid paying this cost. That they could always keep pushing this cost off onto a future generation. But the spending grew too great. The debt grew too high. And, before they knew it, that future generation was here. And it’s us.
The people grew fat and lazy on these generous benefits. And they never worried about the cost. Because the cost was always someone else’s problem. Until now. Not only are they losing some of these generous benefits. But they now have to pay for some of them. The cost being so great that everyone has to pay their ‘fair’ share. Which was fair when ‘everyone’ didn’t include them. But it now includes them. And they don’t like it one bit. So they’ve taken to the streets throughout Europe. Rioting here. Protesting there. And demanding that the rich (anyone who is not them) pay more in taxes so they can continue to live the good life. All funded courtesy of the taxpayers. Who aren’t. Living the good life.
So class warfare escalates. Pitting the rich against the poor and middle class. And the taxpayers against the public sector. Placing these countries on the brink of anarchy. All because the people learned that they could vote themselves money. And did. They got everything they asked for. Including something they didn’t bargain for. The destruction of their countries.
Tags: bubble, capital, class warfare, Communism, debt, democracy, dollars, double digit interests rates, Euro, Eurozone, Fannie Mae, Freddie Mac, Greece, high taxes, housing, housing boom, inflation rate, interests rates, Keynesian, Keynesian economists, Keynesian spending, monetary policy, money, mortgage, printing money, public sectors, recession, risky mortgages, social democracies, stagflation, stimulus, subprime mortgage crisis, tax rates, taxpayers, welfare state
Keynesian Economists’ Poor Forecasts suggests their Keynesian Economics doesn’t Work
More bad news for the housing market. Not that this is a surprise. That was a pretty big housing bubble that the Fed created. With their stimulative low interest rates. And the bigger they are the harder they fall. Or pop, as it were. And as the market corrected the Fed’s damage, it threw a slew of people out of work (see Early Mortgage Delinquencies Rise to Highest in Year as U.S. Economy Slows by Kathleen M. Howley posted 8/22/2011 on Bloomberg).
The percentage of U.S. mortgages overdue by one month rose to the highest level in a year in the second quarter as homeowners who lost jobs were unable to make their payments…
The gain in early delinquencies signals a slowing economy may increase foreclosures, said Jay Brinkmann, chief economist of the trade group. The unemployment rate in the three months ended June 30 rose to 9.1 percent from 8.9 percent, the first quarterly increase since 2009, according to the Labor Department. Jobless claims jumped to an eight-month high in late April, government data show.
For the quarter ending June 30 unemployment was at 9.1 percent. Ouch. Remember why it was so urgent to pass the Obama Keynesian stimulus? To keep the unemployment rate under 8%. That was in February of 2009. That’s two years ago. Guess Keynesian economics doesn’t work.
The world’s largest economy grew at a 1.3 percent annual rate in the second quarter, the Commerce Department said on July 29. That was less than the increase of 1.8 percent forecast by economists surveyed by Bloomberg. A Federal Reserve report last week showed manufacturing in the Philadelphia region contracted in August by the most in more than two years as orders fell and factories fired workers.
Goldman Sachs Group Inc. and JPMorgan Chase & Co. lowered their forecasts for U.S. gross domestic product last week. The U.S. will expand 1.5 percent this year, down from a previous forecast of 1.7 percent, according to Goldman economists in New York. JPMorgan predicts 1 percent growth in U.S. GDP in the fourth quarter, down from an earlier projection of 2.5 percent, the bank said last week.
And the news just keeps getting better. And by better I mean worse. Again another record. This one for manufacturing. And actual GDP numbers are coming in under economists’ estimates. The numbers are so bad these economists are revising their future projections down. It should be noted that the vast majority of mainstream economists are Keynesian economists. Which suggests their Keynesian economics doesn’t work very well.
Inflation Growing at a Greater Rate than Wages equals Real Pay Cuts
These mainstream economists said the Great Recession ended by July 2009. Said that the Obama administration followed their Keynesian advice. Kicked that recession in the behind. And launched the recovery with a Recovery Summer. Yay said the Keynesians. Everything was going to be all right. And yet two years later here we are. Where things are still not right (see Survey: US companies say they’re planning another year of small raises for workers in 2012 by the Associated Press posted 8/22/2011 on The Washington Post).
After increasing salaries by 2.6 percent this year and last year, companies are planning a 2.8 percent bump in 2012, benefits and human resources consultancy Towers Watson reported Monday.
That’s somewhat smaller than raises in the last decade. From 2000 to 2006, the year before the Great Recession began, salaries rose an average 3.9 percent for workers who were not executives.
And the modest bump may not help add much buying power for shoppers. In the 12 months through July, prices for consumers have risen 3.6 percent, according to the government’s latest calculations.
Those lucky enough to have a job are taking real pay cuts to keep those jobs. Inflation is growing at a greater rate than their wages. Which means as prices go up their pay checks will buy less. Despite those raises. High unemployment. And rising inflation. The last time the economy saw numbers this bad was during the Seventies. When we called it stagflation. And blamed Jimmy Carter. Who became a one-term president because of it.
Obama Cares enough about the People to Hide from them on the Golf Course
President Obama is aware of the nation’s woes. He is even thinking about them while on vacation. On Martha’s Vineyard. Playground for the uber rich (see President keeps low profile on Martha’s Vineyard by Mark Shanahan & Meredith Goldstein posted 8/20/2011 on the boston.com).
But it was later, at the Vineyard Golf Course in Edgartown, where the president’s recalcitrance was most evident. Approaching the eighth tee in a golf cart with friend and frequent golfing buddy Eric Whitaker, the president noticed three TV cameras and a Globe photographer across the street. Rather than stop and be photographed teeing off, the president skipped the hole.
That’s how much he cares. He’ll skip a hole during a round of golf just so we don’t see him living well during these bad economic times. Talk about sacrifice. He’s just not playing 17 holes instead of 18. Skipping that hole may have an adverse affect on his handicap. He called for fair-share sacrifice. And he, too, is sacrificing. Walking it like he talks it. So think about this noble act before you start bitching about another tax hike. He skipped a hole of golf.
Obama bailed out General Motors and Chrysler and put Detroit back to Work
But it’s back to work after Martha’s Vineyards. Just like the rest of us after our vacations. Though our vacations are a bit more Spartan these days. And rarely venture farther than our own backyards (see Obama to join unions’ Labor Day festivities in Detroit by Aaron Kessler posted 8/22/2011 on the Detroit Free Press).
WASHINGTON – President Barack Obama will join thousands of union members at Labor Day festivities in Detroit, the Free Press has learned,
Obama will deliver remarks at a Labor Day event sponsored by the Metro Detroit Labor Council, according to a White House official with knowledge of the trip.
While no other details were immediately available, it is likely he would again use the opportunity to tout his administration’s role in the rescues in 2009 of General Motors and Chrysler.
So the president is going to Detroit to celebrate Labor Day. It makes sense. I mean, he bailed out General Motors and Chrysler, didn’t he? And put the good people of Detroit back to work.
With 13.7% Unemployment where’s the Summer Recovery in Detroit?
Then again, looking at the U.S. Bureau of Labor Statistics, it would appear that he has not put the good people of Detroit back to work (see Metropolitan Area Employment and Unemployment Summary posted 8/3/2011 on the U.S. Bureau of Labor Statistics).
Eleven of the most populous metropolitan areas are made up of 34 metropolitan divisions, which are essentially separately identifiable employment centers. In June 2011, Miami-Miami Beach-Kendall, Fla., and Detroit-Livonia-Dearborn, Mich., registered the highest jobless rates among the divisions, 13.9 and 13.7 percent, respectively. Nashua, N.H.-Mass., reported the lowest division rate, 5.4 percent, followed by Bethesda-Rockville-Frederick, Md., 5.8 percent. (See table 2.)
No wonder Maxine Waters is so angry. He skips Detroit on his ‘listening’ bus tour. And vacations on the very exclusive Martha’s Vineyards. While the Detroit area is suffering double-digit unemployment. If he was listening anywhere, it should have been in Detroit.
The Detroit area unemployment rate is 13.7%. While the national rate is only 9.1% for the same period. Yes, the national rate is bad. But it’s not Detroit bad. And this after the automotive bailouts. That put the good people of Detroit back to work. On top of the Obama stimulus. So where’s the Summer Recovery in Detroit? What’s happened to the Motor City?
So this is what a Second Jimmy Carter Term would have been Like
In a word, Obamanomics. His Keynesian policies that were supposed to save jobs have killed jobs. In Detroit. And across the nation. Worse, on top of high unemployment these policies have ignited inflation. Unemployment plus inflation equals stagnation. Misery. And malaise.
So this is what a second Jimmy Carter term would have been like. Makes one want to say, “Welcome back Carter.” But not in that warm nostalgic way like in that Seventies sitcom (Welcome Back Kotter). Of course you never saw Jimmy Carter living it up like Obama. So there are some differences.
This economy will not help Obama in 2012. Worse, the American people will get no relief until after 2012. For it’s like Ronald Reagan said in his campaign against Jimmy Carter (see President Ronald Reagan – Liberty State Park [Pt. 1] at 5:26). A recession is when your neighbor loses his job. A depression is when you lose yours. And recovery is when Barack Obama loses his.
I’m paraphrasing, of course.
Tags: 2012, automotive bailouts, Barack Obama, Carter, Chrysler, Detroit, economic data, economists, economy, General Motors, golf, Great Recession, housing bubble, housing market, inflation, Jimmy Carter, job, jobs, Keynesian, Keynesian economics, Keynesian economists, Keynesian policies, Keynesian stimulus, mainstream economists, Martha's Vineyard, Obama, one-term president, pay cuts, recession, Recovery Summer, stagflation, stimulus, tax hike, unemployment, wages
With Bubbles the Ride Down is never as Enjoyable as the Ride Up
Bill Clinton dealt George W. Bush a horrible hand. Clinton enjoyed the irrational exuberance. He rode the good side of the dot-com bubble. Saw the treasury awash in cash. Dot-com people cashing in their stock options and paying huge capital gains taxes. There was so much money pouring in that projections showed a balanced budget for the first time in a long time. As long as the people stayed irrationally exuberant. And that damn Alan Greenspan didn’t raise interest rates. To rain on his parade.
But he did. The days of free money were over. (For awhile, at least). Because people where bidding up stock prices for companies that hadn’t produced a product or provided a service. Money poured into these dot-coms as investors were ever hopeful that they had found the next Microsoft. These companies hired programmers. Colleges couldn’t graduate enough of them. To program whatever these companies would eventually do. But with the spigot of free money turned off these companies ran out of startup capital. As most of these businesses had no revenue they went out of business. By the droves. Throwing these programmers out onto the street.
And then the great contraction. Which follows a bubble after it is a bubble no more. Prices fell as deflation replaced inflation. And as prices fell, unemployment went up. The phantom prosperity at the end of the Nineties was being corrected. And the ride down is never as enjoyable as the ride up.
Easy Monetary Policy and lack of Congressional Oversight of Fannie Mae and Fannie Mac
And then there was, of course, 9/11. Which further weakened an already weakened economy. So that’s the backstory to the economic activity of the 2000s. A decade that began with the aftermath of one bubble bursting. And ended with an even worse bubble bursting. The subprime mortgage crisis. It was a decade of government stimulus. George W. Bush used both tax cuts (at the beginning of his presidency). And then a more Keynesian approach (tax rebates and tax incentives) at the end of his presidency. In other words, tax and spend.
But the subprime mortgage crisis was so devastating that the 2008 stimulus urged by Ben Bernanke (Chairman of the Federal Reserve) to ward off a possible recession failed. The easy monetary policy and lack of Congressional oversight of Fannie Mae and Freddie Mac caused big trouble. And put far too many people into houses who couldn’t afford them. The housing bubble was huge. And because Fannie and Freddie were buying these risky mortgages and repackaging them into ‘safe’ securities, the fallout went beyond the housing market. Pension funds, IRAs and 401(k)s that bought these ‘safe’ securities lost huge swaths of wealth. The economic fallout was vast. And global.
And then came Barack Obama. A Keynesian if there was ever one. With the economy in a free fall towards a depression, he signed into law an $800 billion stimulus package. Not surprisingly, it turned out that about 88% of that was pure pork and earmarks. Making his ‘stimulus’ stimulate even less than the George W. Bush $152 billion stimulus package. And worked about as well.
Home Ownership was the Key to Economic Prosperity in the U.S.
So let’s look at the numbers. Below is a chart graphing GDP, the unemployment rate and the inflation rate for the 2000s. GDP is in billions of 2005 dollars.
(Sources: GDP, unemployment, inflation. *Average to date (GDP – 2 quarters, unemployment rate – 7 months and inflation – 7 months).)
You can see the fallout of the dot-com bust. The decade opens with deflation and a rising unemployment rate. GDP, though, was still tracking upward. After the bush tax cuts in 2001 (Economic Growth and Tax Relief Reconciliation Act of 2001) and 2003 (Jobs and Growth Tax Relief Reconciliation Act of 2003) you can see improvement. Unemployment peaks out and then falls. Inflation replaces deflation. And GDP grows at a greater rate.
Things were looking good. But lurking in the background was that easy credit. And federal policies to qualify unqualified people for mortgages. To put them into houses they couldn’t afford. All because home ownership was the key to economic prosperity in the U.S.
Which makes the rising rate of inflation a concern. Rising inflation (i.e., expansionary or ‘easy’ monetary policy) created the dot-com bubble. A rising inflation rate can be bad. But at least during this period the growth rate of GDP is greater than the growth in the inflation rate. Which indicates real economic growth. Accompanied by a falling unemployment rate. All nice. Until…
Bernanke and Company Crapped their Pants
Those people approved for mortgages they weren’t qualified for? Guess what? They couldn’t make their mortgage payments. And because Fannie and Freddie bought so many of these risky mortgages, these defaults weren’t the banks’ problems. They were the taxpayers’ problems. And anyone who bought those ‘safe’ securities.
Long story short, Bernanke and company crapped their pants. He urged the $152 billion Economic Stimulus Act of 2008 to ward off a possible recession. This was a Keynesian stimulus. Remember that summer when you got those $300 checks? This was that stimulus. But it didn’t stimulate anything. People used that money to pay down debt. Because they were crapping their pants, too.
The good times were over. That huge housing bubble was bursting. And nothing was going to stop it. Certainly not more of the same (Keynesian stimulus). GDP fell. Unemployment rose. Inflation became deflation. And Bernanke stepped in and turned the printing presses on. Desperate not to make the same mistake the Fed made during the Great Depression. When bad Fed policy caused all of those bank runs.
An Inflation Rate Greater than the GDP Growth Rate may Return us to Stagflation
The Obama administration (all Keynesians) pushed for a massive stimulus to fix the economy. The best and brightest in the administration, Ivy League educated economists, guaranteed that if passed they could hold the unemployment rate under 8%. So they passed it. And Bernanke kept printing money. In other words, more of the same. More of what gave us the dot-com bubble. And more of what gave us the housing bubble. Inflationary monetary policy. And more government spending.
Didn’t work. It took a year for the deflation to end. As the market corrected prices. And readjusted supply to match actual demand. The unemployment rate maxed out around 10%. And the Obama stimulus didn’t move it much from that high.
GDP growth resumed. However, the growth of inflation is now greater than the growth of GDP. A very ominous sign. Indicating that GDP growth is not real. And will likely collapse once the ‘free money’ Fed policies end. Or the growth of inflation coupled with high unemployment return us to the Jimmy Carter stagflation of the Seventies.
Keynesian Stimulus is the way to go if you want Deflation and Recession
Further Keynesian stimulus may only make a bad situation worse. And prolong this economic ‘recovery’. These policies make bubbles. Which are fine and dandy until they burst. Giving us deflation and recession. And the bigger the bubble, the greater deflation and recession that follows.
Tax cuts stimulate. They ended the dot-com recession. All Keynesian attempts during the 2000s have failed. Proving again that tax and spend doesn’t work. Easy monetary policy and government spending does not end well. Unless you want deflation and recession. Then the Keynesian way is the way to go. But if you want to stimulate economic activity. If you want real GDP growth. Then you have to go with tax cuts. As their track record of success shows.
Tags: Alan Greenspan, Barack Obama, Ben Bernanke, bubble, Bush tax cuts, Congressional oversight, deflation, depression, dot com bubble, dot-com bust, Fannie Mac, Fannie Mae, Federal Reserve, free money, GDP, George W. Bush, government spending, inflation, inflationary monetary policy, interest rates, irrational exuberance, Keynesian, Keynesian stimulus, monetary policy, real estate bubble, recession, risky mortgages, stagflation, stimulus, stimulus package, subprime mortgage crisis, tax cuts, tax cuts stimulate, tax hikes, unemployment
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